China's quick response surprises markets, takes dispute closer to trade war

Beijing, Washington

CHINA quickly hit back on Wednesday at the Trump administration's plans to slap tariffs on US$50 billion of Chinese goods, retaliating with a list of similar duties on key US imports including soybeans, planes, cars, whiskey and chemicals.

The speed with which the trade struggle between Washington and Beijing is ratcheting up - the Chinese government took under 11 hours to respond with its own measures - led to a sharp selloff in global stock markets and commodities.

Investors are wondering whether one of the worst trade disputes in many years could now turn into a full-scale trade war between the world's two economic superpowers.

Julian Evans-Pritchard, a senior China economist at Capital Economics, noting that neither had yet called for enforcement of the tariffs, said: "The assumption was that China would not respond too aggressively and avoid escalating tensions. Its response is a surprise for some people.

"It's more of a game of brinkmanship, making it clear what the cost would be, in the hopes that both sides can come to agreement and none of these tariffs will come into force."

Beijing's list of 25 per cent additional tariffs on US goods covers 106 items with a trade value matching the US$50 billion targeted on Washington's list, China's commerce and finance ministries said. The effective date depends on when the US action takes effect.

Unlike Washington's list, which was filled with many obscure industrial items, China's list strikes at signature US exports, including soybeans, frozen beef, cotton and other key agricultural commodities produced in states from Iowa to Texas, which voted for Donald Trump in the 2016 presidential election.

"This is a real game changer and moves the trade dispute away from symbolism to measures which would really hurt US agricultural exports," said Commerzbank commodities analyst Carsten Fritsch.

China's tariff list covers aircraft that would likely include older models like Boeing's workhorse 737 narrowbody jet, but not newer models like the 737 MAX or its larger planes. A Beijing-based spokesman for Boeing declined to comment.

Beijing's announcement triggered heavy selling in global financial markets, with US stock futures sliding almost 2 per cent and US soybean futures plunging nearly 5 per cent and on track for their biggest fall since July 2016. The dollar briefly extended early losses, while China's yuan skidded in offshore trade.

Hours earlier, the US government had unveiled a detailed breakdown of some 1,300 Chinese industrial, transport and medical goods that could be subject to 25 per cent duties, ranging from light-emitting diodes to machine parts.

The US move, broadly flagged last month, is aimed at forcing Beijing to address what Washington says is deeply entrenched theft of US intellectual property and forced technology transfer from US companies to Chinese competitors, charges Chinese officials deny.

Foreign Ministry spokesman Geng Shuang said China had shown sincerity in wanting to resolve the dispute through negotiations.

"But the best opportunities for resolving the issues through dialogue and negotiations have been repeatedly missed by the US side," he told a briefing on Wednesday.

The tariff list from the office of US Trade Representative (USTR) Robert Lighthizer followed China's imposition of tariffs on US$3 billion worth of US fruits, nuts, pork and wine to protest new US steel and aluminium tariffs imposed last month by Mr Trump.

Many consumer electronics products such as cellphones made by Apple and laptops by Dell were excluded, as were footwear and clothing, drawing a sigh of relief from retailers who had feared higher costs for American consumers.

A US industry source said the list was somewhat unexpected in that it largely exempts major consumer grade technology products, one of China's major export categories to the US.

"The tech industry will feel like overall it dodged a bullet," the source said, but added that traditional industrial goods manufacturers, along with pharmaceuticals and medical device firms, could suffer.

Many US business groups support Mr Trump's efforts to stop the theft of US intellectual property, but have questioned whether tariffs are the right approach.

They warn that disruptions to supply chains that rely on Chinese components will ultimately raise costs for consumers.

"Tariffs are one proposed response, but they are likely to create new challenges in the form of significant added costs for manufacturers and American consumers," National Association of Manufacturers president Jay Timmons said in a statement.

USTR developed the tariff targets using a computer algorithm designed to choose products that would inflict maximum pain on Chinese exporters, but limit damage to US consumers.

A USTR official said the list got an initial scrub by removing products identified as likely to cause disruptions to the US economy and those that needed to be excluded for legal reasons.

"The remaining products were ranked according to the likely impact on US consumers, based on available trade data involving alternative country sources for each product," the official, who spoke on condition of anonymity, told Reuters.

The list targeted products that benefit from China's industrial policies, including its "Made in China 2025" programme, which aims to replace advanced technology imports with domestic products in strategic industries, such as advanced information technology, robotics, and pharmaceuticals.

Such policies coerce American companies into transferring their technology and intellectual property to Chinese enterprises and "bolster China's stated intention of seizing economic leadership in advanced technology as set forth in its industrial plans", USTR said.

Many products in those segments appear on the list, including antibiotics and industrial robots and aircraft parts.

USTR did include some key consumer products from China, including flat-panel television sets and motor vehicles, both electric and gasoline-powered with engines of 3 litres or less.

A Reuters analysis that compared listed products with 2017 Census Bureau import data showed US$3.9 billion in flat-panel television imports, and US$1.4 billion in vehicle imports from China.

Among vehicles likely to be hit with tariffs is General Motors' Buick Envision sport-utility vehicle, which is assembled in China and sold in the US. Volvo, owned by China's Geely Motors, also exports Chinese-built vehicles to the US.

More than 200 products on the list saw no US imports last year, including large aircraft and communication satellites, while some categories were highly unlikely to ever be imported, such as China-made "mortars" and "grenade launchers".

USTR has scheduled a May 15 public hearing on the tariffs, which were announced as the result of an investigation under Section 301 of the 1974 US Trade Act.

China ran a US$375 billion goods trade surplus with the US in 2017, a figure that Trump has demanded be cut by US$100 billion. Reuters

READ MORE: Asia, Europe markets recoil as China ups tariff ante